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Income tax credits are a way to decrease the amount of your taxable income. Hence, they are a benefit to you since they lower the amount of taxes you need to pay to the IRS. Income tax credits are categorized as: personal,
Personal tax credits. They are considered personal tax credits since they affect you personally.
There are a variety of credits available for you to take, but each one has restrictions (limitations) and/or qualifications you must meet in order to claim them. Some of these personal tax credits are not refundable if the tax credit amount exceeds your tax liability. Others, however, are refundable.
Some of the personal tax credits considered refundable to you include: earned income credit, health coverage credit, and the additional child tax credit. You will receive a refund of the excess amount of the credit over your tax liability.
On the opposite end are the nonrefundable personal tax credits. This category consists of mortgage interest credit, education credits, retirement savings credit, child tax credit (generally), dependent care credit, adoption credit, credit for the elderly and disabled, and D.C. first-time homebuyer credit. These tax credits are allowed to the full extent of your tax liability. After that, they are nonrefundable. There is, of course, an exception and stipulation to the child tax credit.
For instance, the dependent care credit applies to working people who need to pay others for care (“care costs”) of their dependents in order for them to work. Requirements to receive this tax credit include: have earned income, maintained a house for yourself and the qualifying dependent, and pay outside help for care. The credit ranges between 20-35% with a set limit of expenses for 2006 care costs of one dependent.
For a more detailed listing of tax credits available to you, refer to IRS Publication 503 – Child and Dependent Care Expenses. You will also find IRS Form 2441 (Child and Dependent Care Expenses) helpful. Also, in order to claim the dependent care credit you must include their tax identification number on your Form 1040 when filing your tax return.
|Sheri Ann Richerson|